Need Cash Early? Should You Opt For FF Stocks?

Fundraising Demystified: Issue #83

by Thunder

You can expect us to share a new weekly topic relevant to fundraising successfully!?

What's Below in Issue #83:

- FF Stock- the pros and cons

- Startup Salary Gaps - Podcast #51 w/ Akaash Shah- getting capital without VC

- Free startup resources

Your Pitch Deck Probably Sucks...

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Data Corner

What You Can Expect To Pay Staff As You Scale

The team at Carta found that salaries jump about 20% between companies worth $25 million and companies worth $250 million.

Understandably, in a tech startup, engineers get the highest salaries, averaging about $201K, while CS and marketing salary averages are on the other end of the scale.

Are you ready to increase these costs as your startup grows?

Are FF Stocks For You?

So, you've launched your startup and poured your heart, soul, and sleep into it. Years go by, and your company grows. But let’s be real, living/working out of your parents’ garage indefinitely isn’t glamorous. If you want to cash out a bit by selling shares during the next financing round, some of your options include Secondary Purchase plus Exchange and FF Stocks. I want to talk about the latter today.

?What is FF stock?

In a nutshell, FF (Founder's Fund or Founder-Friendly) Stocks are a hybrid between common and preferred stock that give founders special voting rights that let them maintain more control over their company even after getting investor funding.?

Picture this, you want to take a little money off the table by selling shares at the company’s next round of financing. Here’s the snag: you don’t want to sell your shares at the 409A valuation (if like me, you don't speak tax codes, you can see a simple explanation of this here). They produce an intentionally deflated value. As a founder, you want the same price for their shares as the shares being sold in the current preferred round.

But investors aren’t thrilled about this. They don’t want to pay the preferred price for common shares. And if the company buys back common shares at the preferred price, the difference between what’s paid and the 409A value of the common is likely taxed as compensation. It's a tax headache nobody wants.

So, years ago Sean Parker (you might know him as the co-founder of Napster- remember those glorious days of free music?)? and Founder’s Fund (yes, that’s what the FF stands for) had an idea.? Why not grant a special class of stock to founders that converts into preferred stock at a future financing round??

These founder-friendly stocks can offer a middle ground, balancing the interests of both founders and investors. So why aren't FF Stock deals more common?

I recently spoke to a tax attorney, Mike Baker, about FF Stocks for his take on why more people don't use them. Here are some pros and cons I got from our chat:

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Pros of FF Stocks:

• Retain Control: With FF stocks, you can keep a tighter grip on your company’s direction. No waking up in cold sweats, afraid that your investors might hijack your vision.
• Long-Term Focus: You can focus on long-term goals rather than being pressured to deliver quick returns to appease investors. It’s like being able to steer the ship toward the horizon rather than constantly veering towards every island of short-term profit.
• Better Decision Making: With more control, you can make bold, innovative decisions without as much red tape. Think of it as having the freedom to take your company into uncharted territories without constantly having to check with a babysitter.

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Cons of FF Stocks:

• Investor Skepticism: Not all investors are thrilled about FF stocks. Some might see them as a red flag, indicating that founders are power-hungry and unwilling to share control.
• Dilution Issues: As more FF stocks are issued, the power of regular shareholders can be significantly diluted. This might cause friction and discontent among your investors.
• Potential for Abuse: If not managed wisely, FF stocks can lead to founders making self-serving decisions rather than what's best for the company and its shareholders. Imagine a ship’s captain ignoring the crew’s advice and steering into a storm for the thrill of it (hopefully you aren't that founder).

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The Verdict

So, are FF stocks a founder’s best friend or your potential downfall? Like any tool, it depends on how you use it. If you’re a founder who values control and long-term vision, FF stocks can be great. But tread carefully—alienating investors or misusing this power can spell trouble.

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And remember, in the words of Sean Parker: “Sometimes you want to give people the illusion of being in control.” But with FF stocks, you don’t have to settle for the illusion—you can have the real deal.?

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Cheers to Mike Baker for all the info on FF Stock. Check out his website here for more, especially tax law here: https://mbakertaxlaw.com/?

How Wnydly Tackled Allergies Without Traditional Funding: Now in Episode 51

In this episode, I'm joined by Aakash Shah, founder and CEO of Wyndly, a healthcare startup revolutionizing allergy treatment. Akash shares his journey from personal allergy sufferer to innovative healthcare entrepreneur and reveals how he navigated the challenging waters of fundraising without relying solely on traditional venture capital.

Check It Out

Free Fundraising Resources

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- Access working capital fast - Explore options for free

- Free list of AI Recommended VCs - Apply for free

- Free fundraising coaching session - Schedule 15 minutes with us

?- Playbook for Negotiating Term Sheets - Download it Here

?- Playbook for Setting Up and Sharing Your Data Room - Download it Here

- Playbook for Sending Investing Updates - Download it Here

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